Shock as Apple shuts door on PortalPlayer

Austin, Texas — PortalPlayer Inc.'s grim announcement last week that its new media processor "has not been selected by Apple Computer Inc. for use in their midrange and high-end flash-based iPods" prompted analysts to speculate on who might replace PortalPlayer as the iPod's primary silicon provider.

With Apple looking to cut costs and lower retail prices for its mainstay iPod Nano, and with video playback becoming a standard feature for portable entertainment, analysts saw PortalPlayer as a company caught in the middle.

"PortalPlayer has trouble stacking up with the big companies when it comes to video at really low power consumption, which is a pretty complicated technology to master," said Linley Group president and principal analyst Linley Gwennap, who recently completed a study on processors aimed at cell phones and portable media players (PMPs). "Even Broadcom went out and bought Alphamosaic for its portable video solution," which is used in the iPod with Video product line alongside a PortalPlayer controller, he noted.

Gwennap's list of potential PortalPlayer replacements includes Broadcom, along with Texas Instruments, whose base of low-power video technology is expressed in its DaVinci and Omap processors, and Philips, which Gwennap said has executed on video for its cell phone and set-top solutions. STMicroelectronics also has "a nice little low-power video chip" that could appeal to Apple, he said.

Others put Samsung Electronics in the running, particularly for the most price-sensitive iPod models. James Schneider, an analyst at Wedbush Morgan Securities, said Samsung is "the most likely" processor supplier as Apple tries to reduce its bill of materials for the Nano and achieve retail price targets in the $100 to $150 range, down from about $150 to $200 now.

Samsung has been known to offer "very, very steep discounts on its processors when it is trying to move memory," Schneider said. Samsung could "throw in the processor" as part of a bundled package of NAND flash and controller silicon.

The sting of losing the next-gen iPod promises to be severe for PortalPlayer, which has counted on Apple for at least 90 to 95 percent of its revenue. On Thursday, April 20, PortalPlayer's shares, traded on the Nasdaq, tumbled as much as 45 percent. Schneider and Wedbush colleague Craig Berger issued a report last week that revises the firm's 2007 revenue expectations for PortalPlayer to $84.3 million, from $339.7 million before the announcement.

PortalPlayer CEO Gary Johnson told analysts last week that he was "clearly surprised and disappointed" by Apple's decision. Johnson pointed to challenges in developing the firmware for the company's next-generation MP3 controller, saying "complexities between the firmware and the silicon" had proved nettlesome.

That comment echoed remarks by SigmaTel CEO Ron Edgerton during an announcement to analysts that SigmaTel's revenue for the March-ended quarter would be $30 million to $35 million, not the expected $52 million to $60 million. While the reality check was largely attributed to customers' opting to hold off on purchases until flash pricing settled down, Edgerton also said SigmaTel had suffered delays in delivering its video software.